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Controversy over Observation Status: What Change Could Mean for Your Clients

February 27, 2017

Senior Market Sales has been following an important trend which can severely financially impact those who are of Medicare age — the expanding use of “observation status.”

Last month, a federal judge decided to allow Medicare hospital patients a right to appeal their placement on outpatient observation status and allowed a federal lawsuit to proceed. The case, Alexander v. Cochran, is a proposed nationwide class action lawsuit brought by individuals who were forced to pay up to $30,000 for post-hospital skilled nursing care because they had been classified as outpatients in observation status during their hospitalizations.

Observation status is a designation applied to patients who are not sick enough to be formally admitted to the hospital on an inpatient basis, but are still too sick to go home. Receiving care under outpatient observation status can result in thousands of dollars in higher costs, especially if the person needs post-hospital nursing care. Why? Because Medicare covers care in skilled nursing facilities only if patients were formally admitted to the hospital for three consecutive days.

Treatment given under observation could mean denial of coverage for follow-up care in a skilled nursing facility and leave beneficiaries with the burden of paying for nursing and rehabilitative care themselves.

Hospitals have become motivated to use observation status to avoid penalties from Medicare for improper admissions, specifically patients being re-hospitalized within a month of being discharged. The number of Medicare patients classified as under observation has increased sharply in recent years. The number of patients cared for under observation status reached 1.9 million in 2014, nearly double the number from 2006, according to figures from the Centers for Medicare & Medicaid Services.

The number has grown so much that there is a new law called Notice of Observation Treatment and Implication for Care Eligibility Act, commonly called the “Notice Act.” It requires hospitals to provide written and oral notice, within 36 hours, to patients who are in observation or other outpatient status for more than 24 hours.

The opportunity for patients to appeal is important because of the financial consequences that can result from being categorized in to observation status. The judge’s decision noted evidence of how Medicare pressures hospitals to place more patients on observation status.

One potential solution to this issue would be to change Medicare policy to count any nights spent in the hospital toward the requirement for Medicare to pay for rehabilitation treatment and skilled nursing services. But, to do so will require congressional action and legislation.